Chapter

11 – Notes
Corporations: Separate legal
entities (rights & privileges of a
person)





Public Private

Characteristics Advantages
- separate legal existence - sep. legal entity Disadvantages
- limited liability of s/h’s - sep. of mgmt. & - increase cost and
- transferable ownership rights ownership complexity to
- continuous life - limited liab of s/h’s follow gov’t
- corp. mgmt. - decrease income tax regulations
- gov’t regulations - ease of transfer of - increased
- income tax ownership reporting &
- ability to acquire capital disclosure
- continuous life requirements






Raising Capital






Equity – Chapter 11

Debt – Chapter 10 Sell ownership rights in the form of

shares







Common Preferred
 Lifecycle

(1) Issuance of Shares Dr Cash (or Asset)
Cr Common Shares
Can issue shares in exchange for services
or non-cash assets: ($ x # of units)

ASPE: FV of shares given up
IFRS: FV of consideration received
(2) Reacquisition of Shares Dr. Common or Preferred Shares (@ cost
recorded)
Reasons: Cr. Cash (paid to reacquire shares)
i) increase trading Dr. or Cr. Contributed Surplus***
ii) decrease # of shares issues,
therefore increase EPS & ROE
iii) buyout hostile takeovers
iv) have shares to give as
compensation to employees


Contributed surplus used
***Contributed Surplus to reacquire shares, b/c
R/E account:
b/c cannot cannot recognize
gain/losses of
flow thru I/S transactions of
requisition of own shares


Can’t ever be in a DR balance,
Normal balance is a
therefore amounts > than C/S
credit balance
balance go straight to R/E







Debt Preferred Shares Common Shares



Preferred Shares
- give priority over common shares
- but NO voting rights
- dividend preference (if cumulative)
- liquidation preference
 Dividends
- distribution of R/E’s in proportion to shares held

- types: cash dividends and stock dividends



Cash Dividends: b/f can occur, must meet both:
(i) meet 2-part solvency test (CBCA): sufficient cash or resources to pay
liabilities of dividend declared) and
(ii) must be declared by BofD

3 Important dates:
(a) Date of declaration
(b) Date of Record
(c) Date of Payment

Dr. Dividends declared
Cr. Dividends Payable
Date of declaration


(# of shares issued & o/s x amount per
share declared)


Date of Record NO ENTRY


Date of Payment Dr. Dividend Payable
Cr. Cash


Stock Dividends: dividends paid with shares
(iii) Pros: satisfy s/h’s desire for a div., increase marketability of shares
(iv) Cons: tax implications (pay tax as if received cash)

3 same dates:

Dr. Stock Dividends
Cr. Stock Dividends distributable
Date of declaration


(% x amount shares issued & o/s) x
market value of shares


Date of Record NO ENTRY


Date of Distribution
Dr. Stock Dividend distributable

Cr. Common shares
 Impact of stock dividends
- decrease R/E
- increase common shares
- TOTAL SHE STAYS THE SAME!

Stock Splits
- no impact on:
(i) total share capital
(ii) R/E’s
(iii) SHE’s $ total
- Issue additional shares in proportion to s/h’s held shares
Ex. 10,000 total shares & 2:1 split results in a total 20,000 shares

(HINT: KNOW THE IMPACTS OF DIVIDENDS & STOCK SPLITS ON ACCOUNTS IN
THE STMT OF FIN. POSITION)

Presentation of SHE’s: Stmt of Fin. Position

Contributed Capital:
Share Capital – PS (if cumulative, assoc. $ of div) &/or CS (details of
authorized and o/s # of shares)
Contributed Surplus – amts contributed from acquiring and retiring shares

Retained Earnings

Statement of Changes in Equity

Changes in total SHE’s for period:
- contributed capital
- retained earnings
- accumulated OCI (or AOCI)


Ratios

Payout






Dividend Yield






EPS: (Problem 11-8B)
Net Income – Preferred Share Dividends

Weighted Average Common Shares O/S

ROE